An area that the OECD is now focusing on, and of particular interest to India, is corporate governance. Many lessons can be learnt from the OECD framework for the future securitisation of our legal policies.
Corporate governance goes hand-in-hand with the mitigation of risk, and effective risk management. It is especially relevant in today?s context due to bailouts and ownership of large corporations by the public sector. The OECD, in fact, feels that the financial breakdown is due in no small part to the breakdown of corporate governance, and it feels that numerous conflicts arise when public-owned firms receive government aid. To prevent this from spiraling out of control, these firms ought to adhere to the OECD?s guidelines on corporate governance for state-owned enterprises. In addition, there should be a clear demarcation of when the government exits its ownership of a said firm, so as to effectively implement the guidelines for corporate governance, thereby strengthening the role of corporate governance in financial institutions. In addition to this, a fit and proper person test should be passed to assess the competency and suitability of directors. To balance the requirement of independence with the access to vital information, the risk-officer role could benefit from built-in protections. India could learn much from these guidelines, and should actively consider implementing many of these measures.
An extremely tricky area with respect to corporate governance, and one that OECD touches on numerous times in its guidelines, is of qualification and competence with respect to the composition of the boards, and conceivably, these requirements could also spill over in the future into minimum qualification criteria for the CEO and the CFO in large corporations. There are arguments going both ways, and the encouragement of entrepreneurship blends with risk-mitigation, leaving in its wake more questions than answers. Compliances are a big component for most corporate law frameworks, and corporate governance really came to the forefront with the two big scandals: Enron and Worldcom. The witch-hunt initiated by the then-rising star and Attorney General of New York, Elliot Spitzer, put corporate governance and accountability at the forefront of every large US and multinational corporation out of New York, Delaware, California, and even the US Virgin Islands, with most of them scrambling to comply prior to massive scandals. Audit certification committees and the Sarbanes-Oxley Act have changed the complexion of the US corporate environment, and the way it does business. Now, with the push by OECD to institute stringent corporate governance measures, India needs to sit up and take heed as a preventive measure. India?s growth pattern is such that curative therapy will be too little too late, and the Satyam episode was a good warning signal, but one that shouldn?t be repeated. India is already seen as somewhat difficult to deal with from a legal standpoint, and the reluctance to have complete transparency on the part of large corporate entities make the fear of corporate (mis)governance that much more realistic.
India has thus far escaped any major corporate governance scandal, barring the Stayam episode, which too had no ripple effects from a scandal perspective. Indian firms have been remarkably resilient thus far, but from the standpoint of legal compliance, India is likely behind the game. It needs to put itself into direct compliance with the OECD guidelines, and also take some wisdom from the US experience and evolution. With strong corporate governance principles in place, the fear of the unknown when it comes to investing in India declines significantly and risk-mitigation/accountability estimates are far more reliable. India has strong legal principles guiding it, and its corporate laws are extremely dynamic. It is time for corporations to take that one giant step forward, and carry the Indian wave to the next level: a testament to the new Indian corporate mindset.
The author is a sports & corporate attorney with J Sagar Associates. These are his personal views